SP-500 component VMware (VMW) and maybe NASDAQ wannabee, based on its core technology business and volatile moves in both its stock and option markets, reports after the close. The large-cap virtualization software solutions concern is expected to post profits of $0.20 per share, marking a flat sequential result versus the prior quarter but down three cents from the year-ago period.

If history is any indicator, VMware has made a habit of beating in six of its eight quarters as a publicly listed company. And in the other two periods, the company managed to post in-line results. On the analyst front or who's on board or who's not, VMW saw its estimates raised at Jefferies less than two weeks ago based on its expectations for accelerating IT spending in VMW's business space.

Jefferies sponsorship however only saw the broker upping shares from "Underperform" to "Hold." More recently, Caris & Co. chimed in with an unimpressive "Average" reiteration. And in fact, of the 22 analysts covering shares, the mean recommendation is very "middle of the road" with Yahoo Finance giving VMW a ranking of 3.0 on its 1.0 - 5.0 scale. Additionally and according to Schaeffer's Research, an equal-minded threesome maintain "Strong Buy" and "Strong Sell" "recs and wrecks" and 13 analysts currently rate VMW a "Hold."

On the other hand and of a different opinion, option traders in Tuesday's session were decidedly active in VMW's puts. Relative to the calls, 2.35 contracts puts changed hands on well-above normal volume of 7,700. With still 31 days left on the calendar, one point wide strike selection and generally strong and bearish earnings and/or preannouncement reactions, as Figure 1 below can attest too, it's not much of a surprise the "most active" was dealt across multiple strikes such as the ATM Nov 45s, 43s, 40s and 39 level put.

Figure 1: VMware (VMW) Earnings / Stock Chart
click here to enlarge

With implieds in November trading in the low to mid 50s, option prices are bid as is normally the case in an effort to protect against at least some of the drama spied from our chart. In saying that though, prices are expensive compared to statistical volatility across the board. The current short to longer-term range is from about 25% - 41%.

Given VMW's existing tendency to see an earnings crush of nearly 24% according to Earnings Effect Ranker and also depicted above, traders should anticipate a volatility crush in Thursday's session. Some simple sleuthing of the past four reports pre and after report straddle / strangle values is shown below:

• 10.21.08: Nov 20 / 17.5 strangle: $3.38 per spread P&L: -$0.48 IV Shift: 105% to 87%
• 01.26.09: Feb 22.5 straddle: $3.93 per spread P&L: -$0.80 IV Shift: 84% to 67%
• 04.22.09: May 33/32 strangle: $4.60 per spread P&L: $1.80 IV Shift: 78% to 66%
• 07.22.09: Aug 32 straddle: $4.33 per spread P&L: -$0.53 IV Shift: 61% to 49%

Figure 2: VMW (VMW) Weekly W4 Bear

The straddle / strangle results surveyed show the more typical reaction does look to find a small loss for the delta neutral strategies if held through the earnings event. In this small sample though, the one instance where the position type did profit, the results were strong enough to essentially make a consistent stab at playing earnings in this capacity-a push.

Per my thoughts on the matter now at hand, if push came to shove and in appreciating an overbought weekly with PS Elliott's potential blessing and theoretically expensive but historically cheap premium, I'd say protection is definitely an option worth considering in a real and often enough, mad money market.

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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The information offered here is based upon Christopher Tyler's observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.